Question
You are currently only invested in the Natasha Fund (aside from risk-free securities). It has an expected return of 15% with a volatility of 19%.
You are currently only invested in the Natasha Fund (aside from risk-free securities). It has an expected return of 15% with a volatility of 19%. Currently, the risk-free rate of interest is 3.3%. Your broker suggests that you add Hannah Corporation to your portfolio. Hannah Corporation has an expected return of 20%, a volatility of 60%, and a correlation of 0 (zero) with the Natasha Fund. MANY PARTS TO THIS QUESTION
A. Calculate the required return of Hannah stock. Is your broker right? The required return of Hannah stock is______ %.
Is your broker right YES or NO because the expected return of Hannah stock exceeds the required return. B. You follow your broker's advice and make a substantial investment in Hannah stock so that, considering only your risky investments, 55 % is in the Natasha Fund and 45 % is in Hannah stock. When you tell your finance professor about your investment, he says that you made a mistake and should reduce your investment in Hannah. Recalculate the required return on Hannah stock. Is your finance professor right?
The required return of Hannah stock is _________%. (Round to one decimal place.)
Is your finance professor right? YES or NO because the expected return of Hannah stock is less than the required return. C. You decide to follow your finance professor's advice and reduce your exposure to Hannah. Now Hannah represents 12.521 % of your risky portfolio, with the rest in the Natasha fund. Recalculate the required return on Hannah stock. Is this the correct amount of Hannah stock to hold?
The required return of Hannah stock is_________ %
Is this the correct amount of Hannah stock to hold? YES or NO because now the required and expected returns are very similar. D. Calculate the Sharpe ratio of each of the three portfolios. What portfolio weight in Hannah stock maximizes the Sharpe ratio?
Hint: Make sure to round all intermediate calculations to at least five decimal places.
The volatility of portfolio (b) is_______ (Round to five decimal places.)
The volatility of portfolio (c) is_______ (Round to five decimal places.)
The Sharpe Ratio for portfolio (a) is______(Round to three decimal places.)
The Sharpe Ratio for portfolio (b) is_______ (Round to three decimal places.)
The Sharpe Ratio for portfolio (c) is ________ (Round to three decimal places.)
The Sharpe Ratio is maximized at _____ hannah stock
(A)12.521%
(B)45%
(C) 0% in Hannah Stock.
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